The Value of Information Updating in New Product Development (Lecture Notes in Economics and Mathematical Systems)

Managing uncertainty in new product development projects for improved valuation and decision making is one of the most complex and challenging problems in operations management. It is important for any corporation depending on the success of new products and innovations. This work shows how uncertainty can be handled and partly resolved by conducting an information update during the development process. It is one of the first comprehensive models that combine statistical decision theory in form of Bayesian analysis with a real options framework for projects exposed to different sources of uncertainty. The proposed framework makes an important theoretical contribution in addressing this problem, while at the same time being of significant value to managers who face the difficult task of evaluating and managing complex product development projects. 1 Introduction 1 -- 1.1 Motivation And Problem Definition 1 -- 1.2 Research Objective And Modeling Approach 5 -- 1.3 Structure 6 -- 2 Literature Review 9 -- 2.1 New Product Development 9 -- 2.1.1 Npd Process Characteristics 10 -- 2.1.2 Types Of Uncertainty And Possible Responses 12 -- 2.1.3 Information Generation And Updating 14 -- 2.2 Decision Models With Information Updating 17 -- 2.2.1 Foundations Of Decision Theory And Information Updating 18 -- 2.2.2 Bayesian Analysis 20 -- 2.2.2.1 Foundations And Basic Ideas 20 -- 2.2.2.2 Applications In Supply Chain Management Literature 22 -- 2.2.3 Updating Mechanisms In R&d Models 24 -- 2.3 Real Options Analysis 26 -- 2.3.1 Shortcomings Of Traditional Valuation Methods 27 -- 2.3.2 Real Options 29 -- 2.3.3 Valuation Of Real Options 32 -- 2.3.4 Models And Applications For R&d Projects 35 -- 2.3.5 Attempts Of Combining Bayesian Analysis And Real Options 37 -- 2.4 Summary 38 -- 3 Model Description 41 -- 3.1 Basic Model 41 -- 3.1.1 General Structure And Development Uncertainty 42 -- 3.1.2 Managerial Options And Development Costs 43 -- 3.1.3 Market Uncertainty And Market Payoff 44 -- 3.1.4 Value Function And Dynamic Program 46 -- 3.1.5 Multidimensional State Space 47 -- 3.1.6 Summary 50 -- 3.2 Bayesian Updating 51 -- 3.2.1 Basic Concepts Of Bayesian Analysis And Inference 51 -- 3.2.2 Mean Update 54 -- 3.2.2.1 General Properties 54 -- 3.2.2.2 Multidimensional Case 59 -- 3.2.3 Variance Update 61 -- 3.2.3.1 General Properties 61 -- 3.2.3.2 Multidimensional Case 65 -- 3.2.4 Mean And Variance Update 66 -- 3.2.4.1 General Properties 66 -- 3.2.4.2 Illustrative Numerical Example 72 -- 3.2.4.3 Multidimensional Case 74 -- 3.2.5 Summary 76 -- 3.3 Information Updating Valuation Model 77 -- 3.3.1 General Structure 77 -- 3.3.1.1 Posterior Project Value 79 -- 3.3.1.2 Expected Project Value 80 -- 3.3.2 Value Of Information 82 -- 3.3.3 Optimal Updating Point In Time 85 -- 3.3.4 Multidimensional State Space 86 -- 3.3.5 Summary 87 -- 4 Model Properties 89 -- 4.1 Basic Properties 90 -- 4.2 Properties For A Specific Signal 95 -- 4.2.1 Posterior Project Value 95 -- 4.2.1.1 Mean Change 96 -- 4.2.1.2 Variance Change 98 -- 4.2.1.3 Mean And Variance Change 101 -- 4.2.2 Value Of Information 103 -- 4.3 Properties In Expectation Of A Signal 106 -- 4.3.1 Expected Project Value 106 -- 4.3.2 Expected Value Of Information 111 -- 4.4 Summary 114 -- 5 Numerical Study 117 -- 5.1 Analysis Framework 118 -- 5.1.1 Base Case 118 -- 5.1.2 Description Of Experiments 123 -- 5.2 Numerical Results And Comparative Statics 126 -- 5.2.1 Analysis In Presence Of A Specific Signal 127 -- 5.2.1.1 Effects Of A Mean Or A Variance Update 127 -- 5.2.1.2 Effects Of A Simultaneous Mean-variance Update 129 -- 5.2.2 Analysis In Expectation Of A Signal 135 -- 5.2.2.1 Optimal Managerial Policy 135 -- 5.2.2.2 Cost Structure Changes 142 -- 5.2.2.3 Optimal Updating Point In Time 146 -- 5.3 Summary 152 -- 6 Conclusion 155 -- 6.1 Contribution To Current Research 156 -- 6.2 Managerial Implications 158 -- 6.3 Possible Extensions And Future Research 161. Christian Artmann. Includex Bibliographical References (p. 195-205) And Index.